Jul 13, 2002|
Energy Sources: Slippery times
On liberalization of the economy, like in most industries, foreign multinationals, attracted by the emerging market characteristics, made a beeline for the Indian lubricants industry. Experiencing saturation in home markets, it seems, any growth story was worth testing. Besides a few, most MNCs are unlikely to have had a memorable experience.
The lubricants industry was deregulated in FY03 with the Government transferring base oil imports, the key raw material, to the open general list (OGL). Also, private producers were permitted to market their products through a parallel distribution channel or in industry terminology the 'bazaar segment'. While per capita numbers indicated growth potential, in reality the lube market stagnated in volume terms at an estimated 1 m metric tonnes (MMT). However, in value terms the sector registered growth of 5.8% YoY since FY93 from an estimated Rs 35 bn to Rs 55 bn.
The industry size in value terms increased, as manufacturers successfully shifted promotion and packaging in marketing of lubricants from commodity to consumer products. Thereby, increasing value in the eyes of the consumer. Also, the introduction of specialized lubes led to higher priced products in the market place. An important transformation during this period was the change in lube purchase pattern in favour of 'bazaar' segment. Since decontrol, share of 'bazaar' segment in lube sales has reportedly increased to 73%, as petrol pumps lost their domination in lube retailing. This change in buying behaviour is likely to have fuelled growth for the private players.
That said, over the past two years, the industry, especially private sector companies, have come under pressure, as volumes contracted, competition eroded prices and consumer behaviour trends seem to have saturated. Lubricants business contracted with industry volumes declining by an estimated 10% to 900,000 tonnes over the concerned period. Competition remains stiff with industry remaining fragmented. Currently, as per reports, there are 30 large players in the market with 5,000 small blenders. Top industry players include HPCL, BPCL, IOC, Castrol, Elf, Shell, Pennzoil, Tide, Caltex, Gulf Oil and Fuchs, all fighting for a share of the pie.
Further, competition has intensified with oil PSUs becoming more marketing savvy and launching products at lower price points, which pulled down industry realizations and margins. Also, from 1996 onwards this segment of producers was permitted to target the 'bazaar' segment -- till then the sole franchise of private players. And when it rains it pours, over FY01 and FY02, soaring oil led to rising feedstock -- base oil -- prices, which cut into margins. Consequently, the industry has seen some re-structuring. Tata BP was amalgamated with Castrol India. Gulf Oil India was amalgamated with Hinduja group company, IDL Industries. Tide Water Oil Company, subsidiary of Andrew Yule & Company, is on the disinvestment list and Indian Oil Corp. (IOC) has exited from a JV, Indo Mobil, with Mobil U.S.
Besides a downturn in the auto and capital goods industry, much of the decline in volumes mentioned above, we reckon, was due to lengthening in refill times. With improvement in automobile engine quality and lube manufacturers introducing higher resistant products replacement sales is likely to have been adversely affected. As per some estimates, refill time has almost doubled, which suggests that new vehicle lube demand would have to double to maintain existing volumes. We reckon, the above-mentioned trends in the auto and lubes industry are likely to continue, which could keep pressure on volumes. Also, improving road infrastructure could reduce use of lubricants, as fuel efficiency improves and breakdowns decline.
Giving credit to the enterprise of private sector, identification of the decision maker in the purchase process is likely to have facilitated reversal in buying patterns. The 'bazaar' segment consists primarily of garages, service stations and auto spare part shops and controlling the outcome, in case of the former two, is difficult. Therefore, lube manufacturers focused on the concerned sections to influence the purchase decision. But incremental penetration of 'bazaar' sales is likely to prove challenging. Also, purchases are not impulsive but dependent on vehicle-maintenance patterns. Therefore, while efforts are made to sell lubricants as consumer products, the characteristics maybe different. Consequently, to ensure stickiness of sales, manufacturers have started to tie-up with automobile companies, as consumers are likely to use recommended lubes.
That said, the deregulation in petroleum marketing could offer much-awaited growth opportunities, as lube manufacturers could gain access to fuel retailing outlets. But this is likely to materialise over the medium term. With emission norms, globally, getting tighter the consumption and price of lubricants could increase. But till then, there is not much to cheer.
More Views on News
Mar 27, 2017
GAIL (India) Ltd has announced results for the quarter ended December 2016. reported 9.4% year on year (YoY) decline in sales, while bottom-line grew 45.4% YoY.
Mar 17, 2017
ONGC has announced results for the quarter ended December 2016. The company has reported 9.2 % year on year (YoY) growth in sales, while bottom-line grew 197% YoY.
Jan 24, 2017
Oil India Limited announced results for the quarter ended September 2016. The company has reported an 6.5% and 7.8% Year on Year (YoY) decline in sales and net profit respectively during the quarter.
Dec 3, 2016
GAIL (India) Ltd has announced results for the quarter ended September 2016. The company has reported 16 % year on year (YoY) decline in sales, while bottom-line grew 180% YoY.
Nov 3, 2016
ONGC has announced results for the quarter ended September 2016. The company has reported 10.3 % year on year (YoY) decline in sales, while bottom-line grew 6.3% YoY.
More Views on News
Aug 17, 2017
A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.
Aug 10, 2017
Bill connects the dots...between money and growth, real money and real resources, gold and cryptocurrencies...and between gold, cryptocurrencies, and time.
Aug 12, 2017
The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.
Aug 10, 2017
Bitcoin hits an all-time high, is there more upside left?
Aug 16, 2017
Ensure your financial Independence, and pledge to start the journey towards financial freedom today!
Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement. LEGAL DISCLAIMER:
Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here
. The performance data quoted represents past performance and does not guarantee future results.SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.
Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: firstname.lastname@example.org. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407